Wednesday, December 29, 2010

An Inflation Update from Indiana

A reader emails:


Just wanted to drop a line and update you on inflation in my state of Indiana (I live in Brownsburg, just west of Indianapolis). I can tell you ever since I have been reading/subscribing to your site that I have been keeping a real close eye on prices of things. Indiana is considered a very low cost of living state, but prices here are dramatically going up. I am a business owner of a very small distributor of motor oil and other car related products. So I will give you the skinny of what is going on with my prices on the wholesale/retail level...

Just this year, here is how my pricing has gone up due to raw materials/shipping....

From Jan - July, my price on 4-1 gal jugs was $77.40 and case of quarts was $59.25. August to now, price is $79.40 and $60.75 for previous mentioned. ...

Here are some more examples of prices going up. Sausage dogs at a gas station in the area have gone up from $1.39 to $1.59. Beer prices on 18 packs of Miller Lite (what I buy) used to be $9.99 on sale, now $11.99 on sale. AT&T U-Verse, our tv company, just sent a letter to us last week saying our bill was going up 5%.

Figured I would just drop a line ... Keep up the good work and love the EPJ Daily Alerts. My portfolio is well positioned due to your Daily Alerts.


  1. Maybe you could explain what I'm missing here.

    I see deflation and stagnation for the foreseeable future, as in Japan. The reason is that despite the Fed's efforts, it is impossible to get new money moving out into the market unless someone is willing to take on debt and a lender is willing to extend it. Since both of those are essentially missing (except for the government as borrower of last resort, and that's a separate discussion) there's a dearth of new money in circulation and absent trumping supply/demand pressures prices should stay flat or decline, because in fact the money chasing goods is declining. All the new money is piled up in banks with nowhere to go.

    The government is maxed out, too. $1.5 trillion deficits will not fly for long, and in the meantime it is at best a band-aid.

    Inflation would require a lot of borrowing that isn't happening, for the simple reason that it can't happen, because everyone is tapped out on debt.

    Please tell me where I'm wrong. I mean that sincerely.

  2. @Atticus

    Well, the money is entering the system, M2 has been growing every week since Bernanke started re-investing cash flow he has received from MBS.

    Further, Bernanke can buy anything in the world to get money in the system, the gymnastics about buying Treasury securities that the banks may or may not loan out is just to keep the masses fooled. The money is being lent. Watch money suppply.

  3. Well, here's what this guy Shedlock said about M2 in 2007:

    "Unlike M', the direction of M2 does not seem to give clear economic signals. Note that M2 was rising into the double dip recession of 1982 and rising into the 1991 recession as well. Also note that the single largest dip in M2 was in 1993 while M' was soaring. The years between 1992 and 1995 are all problematic. Finally note that unlike M' where a dip below 5% annual growth was a huge warning sign, the dotted line above shows no such significance. M' seems to be far superior to M2 as a leading indicator."

    Shedlock argues for deflation. Your answer is to keep an eye on M2 but Shedlock says that gauge doesn't tell you much.

    Here's a link to the article where that quote appears:

    Beyond that, yes, money is being lent. Almost exclusively to the government.

    Here's another commentator who agrees with you that there will be inflation, but says that the correlation between inflation and M2 is a negative one, because a rise in M2 indicates a demand for money and a fall in M2 indicates money is being spent, i.e., the velocity is higher:

    An interesting thing about that article is where he says that the Fed provides only currency and reserves, which is my understanding as well, which is why they cannot cause inflation by themselves even when they want to. But I'd be interested to know if you understand differently.

    Can the Fed buy "anything"? In theory, yes. In theory they could drop currency from helicopters. But they never have. Their purchases of "assets" are solely to increase bank reserves or to make "loans" to the federal government. They then rely on banks to put money out into the economy by making loans due to their augmented reserves.

    But the banks can only make loans to qualified borrowers. Usually. They tried making loans to unqualified borrowers in the subprime thing, but that's over now.

    Sorry to go on so long, but I'm still not seeing your point of view in light of the foregoing and I would appreciate if you would address what I've written here if you have the time or inclination.

  4. Shedlock is mixing tyepewriters with personal computers. The M2 of 1982 period was a completely different animal with money market funds just coming on the scene completely distorting those measures.

    It's like saying hey how could you possibly use a typewriter in 1982, there wasn't even email.

    I have know idea what commentator 2 is talking about, use your head, if there is more money around prices go up, but this has nothing to do with the demand for money, in the sense he is talking about it. A demand for money pushes prices down.

    As for the rest of your commentary look at M2 which is going up and also required reserves, those only go up if banks are lending more money.

  5. Maybe it would be better to ask a simpler question. Do you believe the Fed can run into the oft-commented upon "pushing on a string" problem? Do you believe that could actually happen?

  6. "Pushing on a string" can happen if the Fed doesn't print enough money to keep the economy at its manipulated state--most often this occurs during a high inflation period when the Fed is afraid to print more becasue of the inflationary consequences. But that doesn't mean the Fed couldn't print more if it wanted to.

  7. Respectfully, I think you have it exactly backwards. "Pushing on a string" is where the Fed is bumping up bank reserves through open market operations and other methods, but the banks for whatever reason aren't lending. The Fed is giving the banks "money" to lend to goose the economy and the banks aren't lending. It's like the Fed is pushing on a string.

    Agree or disagree: No "new money" can be created unless it is owed back into the banking system. I agree. What do you think?

    If the Fed actually started buying tangible assets, like people's houses or oil wells, that would change I suppose but they have never done that and never will; they will only operate through the banking and lending system.

    Perhaps I should never say never, but in any case we might have an even more worthwhile exchange if you answered that question above.

  8. You can use a term, however you want but the term "pushing on a string" was first used in the early 1980's and that wasn't any period of banks not wanting to lend money out.

    And puhleeze, why are you saying banks aren't lending when required reserves are climbing?

  9. >>And puhleeze, why are you saying banks aren't lending when required reserves are climbing?<<

    Well, that's the whole idea of pushing on a string. The banks are flush with "cash" reserves to lend but they aren't lending because they don't want to or because no one wants to borrow, or both. Bank reserves aren't just climbing, they're exploding. But it doesn't matter because the "money" has no place to go: almost no one is borrowing.

    The government is borrowing, but they can't run $1.5 trillion deficits for long. Or maybe they can.

  10. @Atticus

    Look. You are way over your head, an increase in "required reserves" means more money is being lent out by banks.

  11. I don't think you should use the term "required reserves", because it's confusing. If the "reserve requirement" for banks was increased, that would tend to dampen lending, not increase it.

    What has in fact happened is that the banks' "reserves" have increased. This is what you mean, I think. This occurs through the Fed's "open market operations", among other things.

    An increase in reserves means there is more money AVAILABLE to lend; but it does not mean it is actually being loaned out.

    When the banks retain more reserves than regulations require, that is called "excess reserves", and that has been the situation since '08.

    You seem to understand all this differently, and that's what I am asking. So instead of saying I am "way over my head", could you tell me where I'm wrong, or at least give me a link, to explain just how "increase in required reserves = more money is being lent out by banks"


  12. "Required reserves" is basic monetary policy Federal Reserve 101. Everyone uses it including the Fed. In fact, they publish stats on "required reserves" every week.

    There's nothing confusing about it. It is reserves that banks are REQUIRED to have on hand based on the number of loans they make. If REQUIRED reserves are climbing (and they are), banks are making more loans pure and simple.

    There is a huge differences between simply reserves and required reserves, by not understanding and not differentiating you have created a huge mess in your mind.

  13. I thought you were confusing "reserves" and "required reserves", not me. I know they are different things.

    Please, Robert, can you give me a link that will explain how it is that "an increase in REQUIRED reserves = making more loans pure and simple".

    I promise I'll just read it and not bother you anymore.

  14. And if what you're saying is true, how could there be such a thing as "excess reserves"?

    Are you sure it's me that has a mess in my mind? One of us does. I'll grant you that. It should be pretty easy to straighten out, though.